The West Is Indebted Because China Is Not

The NYT ran a confused column by Kwasi Kwarteng, a Conservative member of the U.K.'s parliament, calling for China to adopt the gold standard. The piece has many bizarre claims, most importantly attributing the U.K.'s prosperity in the 19th century and the U.S.'s prosperity in the post-World War II period to the gold standard, as opposed to the strength of their manufacturing sectors and overall economy.

However the most misleading item is the contrast of China, which does not have much government debt, with the rich countries, that mostly do. These are not unrelated situations. As the piece notes, China has pursued a mercantilist policy of deliberately keeping down the value of its currency in order to make its goods cheaper to people in other countries. This allowed it to increase its exports to the West. (It's important to note that U.S. corporations have also been major beneficiaries of this policy, taking advantage of low-cost labor to gain a competitive edge and increase profits.)

The flip side of this policy is that the rich countries, most importantly the United States, ran large trade deficits. This created a huge hole in demand. There is no easy mechanism for a market economy to make up this sort of gap in demand, which now passes under the name "secular stagnation." In the late 1990s the gap was made up with a stock bubble, in the last decade it was made up with a housing bubble. The bursting of these bubbles left nothing other than government budget deficits to fill the demand gap.

As a practical matter, when rich countries have large trade deficits, their choices are bubbles, large budget deficits, or high unemployment. They also could look to redivide work with shorter workweeks and longer vacations. (The standard economic story is that rich countries should have trade surpluses. Capital is supposed to flow from rich countries that have lots of it to poor countries where it is scarce. But economists never have much problem ignoring their theory when its implications prove inconvenient.) In any case, the issue of China's trade surpluses and rich country government debt are directly related, not independent events.